Want this state job? Apply to Texas

Texas, Louisiana firms now do hiring for California insurance investigators

Governor Edmund G. Brown Jr. signed legislation that overhauls California's worker's compensation program. He visited Barrio Logan business Diego and Sons Printing Inc. on Sept. 18 to sign the bill, and was joined there by workers from several local labor unions, as well as Senate President Pro Tem Darrell Steinberg, Speaker John Perez, business and labor leaders.
— Peggy Peattie

Governor Edmund G. Brown Jr. signed legislation that overhauls California's worker's compensation program. He visited Barrio Logan business Diego and Sons Printing Inc. on Sept. 18 to sign the bill, and was joined there by workers from several local labor unions, as well as Senate President Pro Tem Darrell Steinberg, Speaker John Perez, business and labor leaders.
— Peggy Peattie

If you want a job investigating workers’ comp claims for the largest insurance company owned by the state of California, send your résumé to businesses in Texas and Louisiana.

The State Compensation Insurance Fund — the self-described biggest workers’ compensation insurance company in California — hired corporations in the two Southern states to subcontract private investigator jobs back in California.

The new system — announced in January — is in place, but the transition hasn’t been totally smooth because some in-state providers are unwilling to work under the new conditions. Now, the contracts are being renegotiated with HUB Enterprises of Lafayette, La., and Veracity Research of Dallas.

In 2012, State Fund contracted directly with about 205 investigators — nearly 195 of them in California — spending $6.2 million on what it described as a decentralized patchwork of independent investigators.

“We’re trying to be more consistent with the way that we have these investigations done,” said Maryann Lazernik, State Fund’s manager of special investigations.

Once the new system was announced, HUB and Veracity offered the licensed investigators capped hours on what the investigators consider key parts of the job, like surveillance travel and report writing, with permission needed to work beyond those time limits. The pay rates were set around $60 per hour.

Pushback against the new arrangement began soon after.

“The two chosen companies have the built-in incentive to drive down investigation costs in order to increase their own profits. The loss is to the quality of the investigations aimed at uncovering fraud and abuse,” wrote Michael Julian, president of the California Association of Licensed Investigators, or CALI, in a Feb. 12 letter to State Fund CEO Tom Rowe about the program.

Since that time, the professional organization, which has more than 1,400 California-licensed private investigators, has held monthly meetings with State Fund — most recently on April 22 — as the contracts are renegotiated. Both sides say they are making progress.

The new system, however, is operating without any delays in processing claims, said Gina Simons, a spokeswoman for State Fund.

A state-owned insurance company?

In California, employers are required to buy workers’ compensation insurance for their employees in case they are injured on the job. State Fund — founded by the California legislature in 1914 — doesn’t deny coverage to anyone, Simons said. The public agency operates more like a private insurer: It is self-supporting, has 130,000 policyholders and its contracts have protections in the California Public Records Act.

HUB and Veracity are handling investigations on claims adjustments, such as verifying if someone is actually an employee of a company. Lazernik said claims of insurance fraud would still be handled by 40 in-house investigators across the state.

The move is part of a multiyear transformation of the agency, which has about 4,500 employees and recently closed its San Diego office.

In 2012, State Fund had a net income of $359 million, after paying a $100 million dividend to its qualifying policy holders. In 2011, it netted $130 million, after a $50 million dividend. This year, it introduced a new tiered-rating system and overall reduced rates by 7 percent.

The move to the middlemen

The new investigations system — called Vendor Management — has become popular among larger insurers over the past few years, said Jim Biesterfeld, a private-investigation instructor at California State University Fullerton.

Biesterfeld said the system is good for insurers, but bad for private investigators.

“Now, with use of Vendor Management firms, you have an additional step to go through,” he said. “They don’t know you, they don’t know your work, your name is on a list, and they say it’s your turn in the barrel. A lot of times, adjusters will develop a relationship with individual investigators to determine who are the best ones.”

Lazernik said State Fund staff members would still be involved in choosing investigators.

Julian, of CALI, said State Fund would pay HUB and Veracity a flat fee per case, while the two companies would turn around and pay investigators a per-hour rate for their services. Lazernik and Simons declined to discuss the contracts.

Ed Lopez, a 30-year private investigator from Chula Vista, who did $492.86 worth of work for State Fund last year, said the new arrangement would especially squeeze surveillance report writing. Veracity, for instance, allows 15 minutes per page, single-spaced, at a maximum of two hours without prior approval to go beyond. Lopez said that’s below the industry standard and would make it difficult to document every fact. He said one of his recent reports reached 45 pages.

Origins of these companies

HUB and Veracity were selected after a process that began more than a year ago. State Fund sent a Request for Proposal to 167 vendors that responded to its initial inquiry, most of them based in California, Simons said. She said HUB and Veracity were among seven semifinalists, including two from California.

The choice was not publicly decided by State Fund’s largely governor-appointed board of directors because its executive management has the authority to approve contracts alone.

“We’re not limited to taking the lowest price,” Lazernik said. “We picked the vendors that were best matched.”

HUB and Veracity will be subject to the California Franchise Tax of 8.84 percent for their in-state taxable income. But those two companies may have been able to offer the best deal because other aspects of their business were cheaper due to lower costs in Texas and Louisiana. Biesterfeld, who was a contracted investigator for State Fund in the 1990s, said the out-of-state choice was telling.

“California has priced itself out of the market for doing some of this stuff,” he said.

Simons said criticisms of money being spent on out-of-state firms are overblown.

“The work is being done in California and all of the private investigators who want to be part of this network, they’re paying taxes here,” she said.

State Fund denied a request under the California Public Records Act for a copy of its Request for Proposal.

In 2012, all state agencies combined spent about $15.4 billion on non-IT services on companies based in California. That accounts for 98 percent of their spending in that category, the Department of General Services reports. Agencies are allowed to contract with out-of-state businesses so long as the selection process was fair, said Michael Liang, a spokesman for the department.

Lazernik said the process was equitable and that HUB and Veracity made the best proposals.

The local industry

Moving forward, it appears the industry for in-state firms won’t be as lucrative.

State Fund directly contracted with about 195 California investigators in 2012.

The most work went to James L. Davison and Associates, of Fresno, who received about $518,615 for providing investigative services. An additional 18 firms were paid more than $100,000 each.

State Fund contracted with 10 investigation firms in San Diego County, spending a combined $122,814. Baechler Investigative Services led the local industry with $88,594 worth of work.

But also last year, State Fund contracted with 12 out-of-state firms, including HUB and Veracity. HUB got $38,940 worth of work, while Veracity was contracted for about $18,438.

U-T San Diego received the financial data from State Fund via the California Public Records Act.

HUB and Veracity did not respond to requests for comment. State Fund and CALI plan to meet again May 29 to continue working out the issues.